ARLINGTON,
VA. – USDA's 2011 Agricultural Outlook Forum opened Thursday
morning with bullish forecasts for the U.S. farm economy coupled with
warnings of increased price volatility and therefore increased risk
throughout the supply chain. Next, a panel of commodity market
experts explained how new markets have developed to manage the
increased risk.

IHS
Global Insight Chief Economist Nariman Behravesh opened the
discussion by predicting that “most commodity prices can be
expected to rise by at least 10% in 2011” but that this surge will
be a continuing “roller-coaster ride.”

Infinium
Capital Management Founder & CEO Charles Whitman gave a
history of risk management going back to ancient Greece, noting that
“in the 1800s, the volatility of pricing in agricultural products
led to the invention of futures contracts.” Today, he says his
brokerage firm is part of a highly complex, highly effective and
increasingly transparent electronic trading system which now includes
derivatives and which enables businesses “to hedge away the risks
and focus on their core competencies.”

Whitman
said the increasingly sophisticated global electronic trading system
“is bringing transparency, is bringing access to many more markets
and many more products, with access to them 24 hours a day. It's
bringing increased volume and increased liquidity. It's bringing
tighter spreads between the bid and the offer. It's bringing faster
contract adoption.” Recalling his own pre-electronic-trading days,
he said “when the Chicago Board of Trade wanted to launch a new
contract, it physically had to carve out space on the floor, it had
to build a pit.” He said now the process is quick and easy and
“market makers like myself can price and provide liquidity equally
as quickly.” He said electronic trading provides instant reporting
and risk management so that “you know instantly whether you are
filled or not, you know the price,” making it possible to
“instantaneously manage your risk.”

To
show how quickly electronic trading has evolved, Whitman pointed out
that while there were only nine CME ag contracts in 2007 with over
50% electronic volume, that number jumped to 30 contracts last year.
For the same period, the total number of CME ag contracts grew only
from 37 in 2007 to 63 last year. Adding to the changed situation, the
contracts now are traded globally by 28 ag exchanges in the U.S.,
Asia, Africa, Australia, Canada, China, India, Latin America and
Europe. The result, he says is that it's now much easier to hedge
specific risks. He predicts that “the futures market will be
exciting for those who embrace the electronic trading of ag markets.”
He adds that “Companies will be able to hedge in new ways” with
“cheaper cost of hedging and lower execution costs” and with the
added benefit of dampening price volatility “and helping to keep
overall food prices lower.”

Commodity Markets Council President
Christine Cochran said one key to how well markets will work in
dealing with increased volatility and risk will be the new trading
rules being hammered out currently by the Commodity
Futures Trading Commission (CFTC) to implement the Dodd-Frank
financial reform law which Congress passed last year. She noted
particularly that for the first time, the CFTC will set capital and
margin requirements for the previously unregulated swaps market.

Whitman
warned that CFTC will have a challenge handling its massive new
responsibilities since it's already “overwhelmed, understaffed and
underbudgeted.” He said he remains hopeful, saying the purpose of
Dodd-Frank “is to try to level the playing field, to give people
greater access and to have more security in clearing and margin.”
But he says the bill's ultimate success will depend on both getting
adequate funding and staff to enforce new provisions and also making
the right calls on defining swaps and setting margin requirements.

Those warnings were echoed across town
at a Commodities Futures Trading Commission (CFTC) rule-making
meeting Thursday. CFTC Commissioner Michael Dunn said the CFTC “is
under serious strain at its current funding level. We lack the staff
and technological resources necessary to implement Dodd-Frank and
continue to fulfill our pre-Dodd-Frank duties under the Commodity
Exchange Act.”

Dunn
warned that “without additional funding, the strain will only
become worse in July, when much of Dodd-Frank goes into effect. At
that point, in addition to our traditional oversight of the futures
industry, we will also be regulating the swaps market – a market
that has been estimated to be nine times larger than the futures
market.” Noting that the just-passed House budget bill “would cut
the Commission’s already tight budget by nearly a third,” Dunn
said “With a further cut in our budget, the Commission will have to
abandon its principle based regulatory regime and adopt a
prescriptive or even a restrictive regime. I am fearful this would
have a negative impact on both the futures and swaps industries in
the United States. There would essentially be no cop on the beat.”

This week’s guest on Open Mic is Rod Hebrink, President and CEO of Compeer Financial. The lack of certainty from a new farm bill and weak commodity prices due to lost export markets and robust supplies have left farmers and lenders with a grim outlook for 2019. In this interview, Hebrink discusses the challenge of the unknown and the need for legislators and the White House to take action on farm policy, trade and regulations to help rural America prepare for the year ahead.

The world of agriculture extends beyond what’s growing in your field or living in your barn, and here at Agri-Pulse, we understand that. We make it our duty to inform you of the most up-to-date agricultural and rural policy decisions being made in Washington D.C. and examine how they will affect you – the farmer, the lobbyist, the government employee, the educator, the consultant and the concerned citizen.